Many people reading this article will have faced substantial tax liabilities last month. Here are ten tips that could help to reduce your tax liabilities for the 2021/22 and 2022/23 tax years…
- Maximise pension contributions. Pension contributions to a workplace pension scheme will be deducted from your salary before income tax is calculated. If you contribute to a personal pension scheme, your pension provider will claim tax relief at 20% on your behalf and add it to your pension pot. If you are a higher or additional rate taxpayer, you can then claim tax relief on the extra 20% or 25% in your self-assessment tax return.
- Use your tax-free ISA allowance. You can currently save up to £20,000 per tax year in an Individual Savings Account (“ISA”). This can be saved tax free as cash, shares, or a combination of the two.
- Take advantage of the dividend allowance. The current dividend allowance is £2,000 per tax year, meaning the first £2,000 of dividend income is tax free.
- Increase dividend payments in 2021/22. With dividend tax rates set to increase by 1.25% for all income tax bands from 2022/23, it may be worth bringing dividends forward to the 2021/22 tax year if practically possible.
- Claim the marriage allowance. Provided that both individuals are basic rate taxpayers, the marriage allowance lets you transfer 10% of your tax-free personal allowance, currently £1,260, to your spouse if they earn more than you. To benefit as a couple, the lower earner must have income of £12,570 or less in the current tax year.
- Make the most of each personal allowance and basic rate band. The tax-free personal allowance is currently £12,570 and the basic rate tax limit is currently £50,270. If you are married, it may be possible to transfer income-generating assets (e.g. rental properties) to a spouse to take advantage of their lower tax brackets.
- Take advantage of the CGT annual exemption. Capital gains under the annual exemption (currently £12,300) are tax free. Where you have already used up your annual exemption, you may wish to consider deferring any further disposals until the following tax year if practically possible. If you are married, owning assets jointly also ensures that each spouse’s annual exemption is used (assets can be transferred tax free between spouses).
- Claim tax deductible expenses. If you are self-employed, you can claim a tax deduction for expenses which are incurred “wholly and exclusively” for the purposes of your business. This includes office running costs and the salaries of any employees, including your spouse.
- Maximise capital allowances. If you are self-employed, the annual investment allowance provides a 100% tax deduction on, currently, the first £1,000,000 spent on eligible plant and machinery. A new 130% super-deduction capital allowance is also available to companies investing in qualifying new planta and machinery assets up until 31 March 2023.
- Consider electric vehicles. Purchasing a new and unused electric vehicle as a company car may attract a 100% capital allowance tax deduction, while employees may utilise a salary sacrifice arrangement to gain tax savings on vehicle payments from their salary before deducting income tax and National Insurance Contributions. Electric vehicles also attract lower benefit-in-kind charges when compared to other vehicles.
Please get in touch with your usual Ryecroft Glenton contact on 0191 281 1292 if you would like to discuss any of the above in further detail.